Board interview points for prospective purchasers

This is capitalized because it was written as a presentation and I needed the large letters for my weak eyes!

HELLO LADIES & GENTLEMEN

I AM GLAD YOU WERE ABLE TO COME.

I AM GOING TO DISCUSS THE FINANCIAL ASPECTS OF THE BOARD APPROVAL PROCESS AND, WHERE APPLICABLE, ANCILLARY FACTORS THAT TOUCH UPON THE FINANCIAL ASPECTS OF THE APPLICANT AND HIS OR HER SUITABILITY.

FIRST SOME COMMENTARY

THERE ARE MANY WHO BELIEVE THAT THE REQUIREMENTS PERTAINING TO FINANCES PLACED ON AN APPLICANT ARE QUITE ONEROUS. INDEED, MANY APPLICANTS HAVE COMMENTED THAT IF THE BOARD MEMBERS THAT WERE EVALUATING THEM HAD TO COMPLY WITH THE SAME REQUIREMENTS THAT MANY WOULD NOT PASS.

BE THAT AS IT MAY, REJECTION OF APPLICANTS WITHOUT EXPLANATION HAS RESULTED IN THE BILLS BEFORE THE LEGISLATURE REQUIRING BOARDS TO DIVULGE THEIR DECISION MAKING PROCESS. SO FAR, WE ARE FORTUNATE THAT NONE HAVE BECOME LAW. HOWEVER, CONTINUING COMPLAINTS MAY RESULT IN SUCH A LAW IN THE FUTURE AND IT IS MY BELIEF THAT WE MUST DO EVERYTHING IN OUR POWER TO AVOID SUCH AN OUTCOME.

AS YOU KNOW, THE INTERVIEW PROCESS COVERS MANY AREAS OF WHICH THE FINANCIAL AREA IS, PERHAPS, THE MOST IMPORTANT.

AS YOU ALSO KNOW, THERE CAN BE NO DISCRIMINATION IN MAKING YOUR DECISION WITH ONE EXCEPTION – FINANCES. REJECTION OF AN APPLICANT BASED UPON FINANCES CANNOT BE CHALLENGED AS DISCRIMINATORY PROVIDED THAT THE DECISIONS ARE UNIFORM AND MADE PURSUANT TO A SET OF GUIDELINES THAT ARE UNIFORMLY APPLIED.

THEREFOR, THE BOARD SHOULD ESTABLISH A SET OF FINANCIAL GUIDELINES THAT SHOULD BE FOLLOWED WITH ALL APPLICANTS. MORE ON THIS LATER.

THE BOARD MAY HAVE INCOME REQUIREMENTS, ASSET REQUIREMENTS, MAXIMUM DEBT TO INCOME RATIOS AND CASH DOWN PAYMENT REQUIREMENTS. MOST OF THESE HAVE BEEN THE SUBJECT OF NUMEROUS ARTICLES AND DISCUSSIONS AND NEED NOT BE DEALT WITH IN DEPTH HERE BUT I WILL BE HAPPY TO ANSWER QUESTIONS LATER. SOME BOARDS INSIST ON AT LEAST 20% DOWN. SOME BOARDS WANT NO MORE THAN 30% OF INCOME GOING TO PAY DEBT, SOME BOARDS MAY REQUIRE A MINIMUM LEVEL OF ASSETS. NONE OF THESE REQUIREMENTS SHOULD BE “ONE SIZE FITS ALL” AND EACH SHOULD BE TAILORED TO THE CHARACTERISTICS OF THE PARTICULAR BUILDING.

AGAIN, SOME OF THE REQUIREMENTS ARE QUITE INTRUSIVE. YOU MAY REQUIRE AN APPLICANT TO SUBMIT SEVERAL YEARS OF TAX RETURNS, PROOF OF INCOME WITH W-2S AND/OR 1099s AND ADDITIONAL PROOF OF OWNERSHIP OF ANY OTHER ASSETS THAT THE APPLICANT WANTS THE BOARD TO CONSIDER.

THE BOARD THEN CAN USE THIS INFORMATION TO DETERMINE PURSUANT TO THE AFOREMENTIONED GUIDELINES WHETHER OR NOT ANY PARTICULAR APPLICANT MEETS THE CRITERIA FOR APPROVAL. HOWEVER, MEETING THE CRITERIA SHOULD NOT BE THE ONLY TEST RELATING TO FINANCIAL VIABILITY OR APPROVAL.

FOR EXAMPLE, AN APPLICANT MAY NOT MEET THE STRICT INCOME CRITERIA BUT MAY BE PAYING ALL CASH. AN ALL CASH PURCHASER MAY NOT HAVE A HIGH INCOME BUT MAY NOT NEED AS HIGH AN INCOME AS WOULD OTHERWISE BE NECESSARY IF THEY HAVE NO MORTGAGE. RETIRED PERSONS ON LIMITED INCOMES THAT HAVE SOLD A PRIMARY RESIDENCE AND ARE RELOCATING TO SMALLER, MORE AFFORDABLE DWELLING COME TO MIND. WHILE THEY MAY NOT MEET THE STRICT INCOME CRITERIA, THEY WILL PROBABLY BE AN EXCELLENT MEMBER OF THE COMMUNITY AND WILL PROBABLY BE WELL ABLE TO AFFORD IT. THE APPLICANT MAY NOT MEET THE FINANCIAL CRITERIA BUT MAY A YOUNG PERSON WITH EXCELLENT PROSPECTS WHOSE INCOME HAS NOT YET STARTED TO GROW AND/OR WHOSE LIABILITIES (STUDENT LOANS ETC) MAY BE HIGHER THAN THE GUIDELINES ALLOW. SUCH A PERSON MAY HAVE A HIGH INCOME BUT MAY NOT HAVE ENOUGH CASH TO MAKE A 25% DOWN PAYMENT ESPECIALLY IN VIEW OF THAT FACT THAT PRICES HAVE RISEN DRAMATICALLY OVER THE LAST FIVE YEARS. INDEED, MANY UNITS NOW SELL FOR 3,4 OR $500,000. IN SUCH A CASE, A 25% DOWN PAYMENT REQUIREMENT MEANS THAT A YOUNG PERSON HAS TO COME UP WITH AS MUCH AS $150,000 CASH INCLUDING CLOSING COSTS TO BUY. NOT MANY YOUNG PEOPLE HAVE THAT AMOUNT OF MONEY AND GETTING IT FROM A THIRD PARTY JUST TO MEET AN ARBITRARY LIMIT DOES NOTHING FOR THE COOP SINCE THEY REALLY DO NOT HAVE THE MONEY ANYWAY. CASES SUCH AS THESE REQUIRE A BIT MORE STUDY AND PERHAPS SOME FLEXIBILITY. IN ANOTHER SITUATION, AN APPLICANT MAY HAVE MORE THAN ENOUGH MONEY AND ASSETS BUT SIMPLY IS NOT BE SUITABLE FOR RESIDENCY IN YOUR BUILDING. IT IS IMPORTANT TO HAVE A MIX OF RESIDENTS IN ORDER TO KEEP YOUR BUILDING VIBRANT AND ATTRACTIVE. REQUIREMENTS THAT ARE TOO HARSH WILL EXCLUDE MANY YOUNG PEOPLE WHO HAVE EXCELLENT INCOMES BUT HAVE NOT ACCUMULATED ENOUGH CASH TO PUT DOWN $150,000.

IF THE APPLICANT IS A NICE PERSON, HAS GOOD REFERENCES AND EXCELLENT PROSPECTS AND WOULD MAKE A GOOD ADDITION TO THE BUILDING, THE BOARD MAY DECIDE TO ACCEPT HIM ANYWAY. MANY BOARDS INSTINCTIVELY FEEL THAT PROFESSIONALS ARE TO BE PREFERRED. WHILE THAT MAY OR MAY NOT BE TRUE, EXPERIENCE SHOWS THAT PROFESSIONALS ARE OFTEN NOT WORTH THE TROUBLE. IN MY MANY YEARS OF EXPERIENCE IN THIS FIELD, PROFESSIONALS HAVE CREATED A DISPROPORTIONATE AMOUNT OF PROBLEMS. YOU SHOULD NOT JUDGE A BOOK BY ITS COVER.

IN ADDITION, IT IS VERY IMPORTANT TO REMEMBER THAT, AT THE END OF THE DAY, THE COOP HAS LITTLE OR NO DOWNSIDE RISK IN ANY CASE. THE COOP HAS A LIEN FOR MAINTENANCE THAT IS SUPERIOR TO ALL OTHER LIENS, INCLUDING THAT OF A MORTGAGE. THUS, IN THE EVENT OF NON PAYMENT OF MAINTENANCE, THE PROPRIETARY LEASE ALLOWS THE COOP TO UNDERTAKE VARIOUS ACTIONS TO PROTECT ITSELF FROM FINANCIAL LOSS SUCH AS RERENTING THE UNIT FOR THE ACCOUNT OF THE SHAREHOLDER AND DEDUCTING ITS MAINTENANCE AND COSTS FIRST AND/OR SELLING THE UNIT TO RECOUP ANY LOSSES IN CONNECTION WITH THE OWNERS DEFAULT INCLUDING ALL MAINTENANCE AND FEES.. THAT IS THE PURPOSE OF THE RECOGNITION AGREEMENT.

WHERE A PURCHASER HAS A MORTGAGE, IT IS ALSO IMPORTANT TO REMEMBER THAT A BANK HAS ALREADY REVIEWED THE APPLICANT AND DECIDED TO LEND HIM MONEY. IN THAT REGARD THE BANK HAS FAR MORE TO LOSE THAN THE COOP. WHILE SOME SAY THAT THIS IS NO LONGER AS IMPORTANT A FACTOR AS IT USED TO BE, AS A RESULT OF THE SUB PRIME MORTGAGE PROBLEM, I DON’T THINK THIS WILL BE PROBLEM IN THE FUTURE. THEN AGAIN, THERE ARE MANY BUILDINGS THAT CATER TO SUB PRIME PURCHASERS.

CREATING FINANCIAL GUIDELINES THAT ARE TOO STRICT CAN ALSO HAVE A NEGATIVE IMPACT ON THE BUILDING BY UNDULY LIMITING THAT POOL OF PROSPECTIVE PURCHASERS.

AS FOR THE GUIDELINES, AS A GENERAL RULE THE BOARD SHOULD SEE AT LEAST TWO OR THREE YEARS OF TAX RETURNS, DO A FULL CREDIT CHECK AND GET A CREDIT SCORE AND REQUIRE A REASONABLE DEBT TO INCOME RATIO. HOWEVER, AS I MENTIONED BEFORE, THESE THINGS CANNOT BE WRITTEN IN STONE. OFTEN THOSE WITH THE BEST FINANCIALS TURN OUT TO BE THE WORST OWNERS. THUS IT IS EVEN MORE IMPORTANT FOR BOARD NOT TO BE BLINDED BY STRICT NUMERICAL CRITERIA. THE BOARD MUST CONSIDER THE WHOLE PACKAGE, NOT JUST FINANCIALS

IN CLOSING, THERE ARE FOUR POINTS I WOULD LIKE TO EMPHASIZE;

1) APPLY THE GUIDELINES AS UNIFORMLY AS POSSIBLE WHEN MAKING YOUR DECISION BUT NOT SO HARSHLY AS TO RENDER YOUR BUILDING UNAFFORDABLE TO THOSE WHO MAY MAKE EXCELLENT RESIDENTS,

2) WHEN DECIDING TO BEND THE RULES, BEND THEM FOR THE POSITIVE, NOT THE NEGATIVE

3) BE FLEXIBLE NOT DOGMATIC. IF AN APPLICANT LOOKS GOOD, MAYBE HE IS GOOD AND DESERVES TO BE IN YOUR BUILDING EVEN THOUGH THE CRITERIA ARE NOT STRICTLY COMPLIED WITH AND

4) DON’T FORGET THAT THE COOP HAS THE ULTIMATE ABILITY TO COLLECT ANY MONIES OWED TO IT IN THE EVENT OF DEFAULT AND HAS VIRTUALLY NO DOWNSIDE RISK.

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